This most recent announcement sent investors into a frenzy, with many panic-selling their investments to avoid incurring fed-induced losses. For investors who can’t stomach the roller coaster that is investing in the stock market in a high-inflation environment, they’re turning to safe haven assets like treasury bills—and it may pay off in the short-term.
Investors may be able to generate ‘attractive returns’ as rates continue to rise
Treasury bills, sometimes referred to as T-bills, are short-term securities issued by the U.S. treasury that are backed by the U.S. government with terms ranging from four weeks to 52 weeks.
For the duration of your term, you’re agreeing to lend the U.S. government money in the form of this bill, which is usually sold in increments of $100. When your treasury bill reaches maturity at the end of your term, you’ll get your money back—plus interest. And, unlike other savings vehicles like certificates of deposit (CDs), you can sell a treasury bill before it matures. For savers who value liquidity, this could be a key selling point.
T-bills are sold at face value or at a “discount.” And once they mature, you get the face value in return. The difference between the face value and the discounted price you initially paid is “interest.” That discount represents the rate of return you can expect once your T-bill reaches maturity.
Say a $1,000 52-week (one-year) bill sells for a discount rate of 0.04%. To see what the purchase price will be for a particular discount rate, use the formula:
Price = Face value (1 – (discount rate x time)/360)
In this example it would be: Price = 1000 (1-(.04 x 365)/360
Giving us $959.44
In this example, the bill sells for $959.44, giving you a discount of $40.56. So when you get $1,000 after a year, you have earned $40.56 in “interest.”
“T-Bills are an attractive option for investors today because their yields are higher than longer Treasuries that have maturities ranging from 2 to 30 years. Depending on the length of the T-Bill investors can get yields approaching 5%,” says Kevin Nicholson, Global CIO of Fixed Income at RiverFront Investment Group. “For example, a 6-month T-Bill is currently yielding 4.75% while the 10-year Treasury is yielding 3.47%. Therefore, investors do not have to tie up their money for a long period of time to get an attractive return.”
How to invest in T-bills and what to consider before you do
You can invest in treasury bills directly from the U.S. government via the TreasuryDirect portal, although treasury bills can also be purchased and sold through your bank or brokerage.
Experts say there are a few considerations you should make before taking the leap.
- Rising interest rates: The Fed’s recent interest rate increase likely won’t be the last, which could influence the T-bill term you select. “Investors should consider their interest rate expectations over the next year given that the Fed has raised interest rates to fight inflation,” says Nicholson. “Investors must weigh the possibility of facing reinvestment risk, that is the potential that yields could be lower when the T-Bill matures, especially if they choose to invest in shorter maturity T-Bills as a substitute for long maturing treasuries today.”
- You’ll still owe (some) taxes: T-bills are exempt from state and local taxes, although they are still subject to taxes at the federal level.
- T-bills won’t reward you with regular interest payments: If you’re looking for a pick-me-up in the form of a regular interest payment, T-bills aren’t for you. Because T-bills are short-term investments, you won’t receive frequent interest payments the way you would with a bond or high-yield savings account.
The takeaway
If you’re new to investing, or simply looking for a low-risk way to grow your money in a volatile market, you might consider buying treasury bills. Although, it’s important to make sure that you understand how they work, how much you stand to gain at maturity, and determine whether this type of investment fits into your investment strategy.
FAQs
T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.
What do you need to know about T-bills? ›
Treasury bills (or T-bills) are U.S. debt securities that mature over a time period of four weeks to one year. The most common terms for T-bills are for four, eight, 13, 17, 26 and 52 weeks. Treasury bills can be bought directly from the government at TreasuryDirect.gov or through a brokerage account.
How much does a $1000 T-bill cost? ›
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
Is Treasury bills a good investment? ›
Treasury bills are considered one of the safest investments you can make since they are backed by the full credit of the U.S. government, which has never defaulted on its debts.
How do you make money from Treasury bills? ›
Bills pay interest only at maturity. The interest is equal to the face value minus the purchase price. Bills are sold in increments of $100. The minimum purchase is $100.
What is the downside of T-bill? ›
T-bills pay a fixed rate of interest, which can provide a stable income. However, if interest rates rise, existing T-bills fall out of favor since their return is less than the market. T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.
Do you pay taxes on T-bills? ›
Key Takeaways
Interest from Treasury bills (T-bills) is subject to federal income taxes but not state or local taxes.
Which is better, T-bills or CDs? ›
T-bills have a key advantage over CDs: They're exempt from state income taxes. The same is true with Treasury notes and Treasury bonds. If you live in a state with income taxes, and rates are similar for CDs and T-bills, then it makes sense to go with a T-bill.
What is the 6 month treasury bill rate? ›
6 Month Treasury Rate is at 5.40%, compared to 5.41% the previous market day and 5.05% last year. This is higher than the long term average of 2.83%. The 6 Month Treasury Bill Rate is the yield received for investing in a US government issued treasury security that has a maturity of 6 months.
How much do you make on a 3 month T-bill? ›
3 Month Treasury Bill Rate is at 5.26%, compared to 5.26% the previous market day and 5.00% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.
Buffett takes an entirely different approach. Berkshire held more than $360 billion of stocks, $167 billion of cash (mostly Treasury bills), and just $24 billion of bonds at the end of 2023. Nearly all those investments were held at its insurance unit.
Can Treasury bills lose value? ›
Like Treasury bonds and notes, T-bills have no default risk since they're backed by the U.S. government.
Why not to buy Treasury bills? ›
Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.
What happens when a T-bill matures? ›
When the bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.
How to buy T-bills for beginners? ›
You can only buy T-bills in electronic form, either from a brokerage firm or directly from the government at TreasuryDirect.gov. (You can also buy Series I savings bonds through TreasuryDirect.gov.)
Are Treasury bills easy to sell? ›
Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time. Also, most Treasury securities are liquid, which means they can easily be sold for cash.
Do banks charge to buy T-bills? ›
Buy Treasury bills through a bank
However, the bank may charge you fees or commissions for the transaction.
What do 6 month T-bills pay? ›
Basic Info. 6 Month Treasury Bill Rate is at 5.18%, compared to 5.17% the previous market day and 4.80% last year. This is higher than the long term average of 4.49%. The 6 Month Treasury Bill Rate is the yield received for investing in a US government issued treasury bill that has a maturity of 6 months.
What is the minimum deposit for T-bills? ›
The minimum amount that you can purchase of any given Treasury Bill, Note, Bond, TIPS, or FRNs is $100. Additional amounts must be in multiples of $100.
What do you need to buy a Treasury bill? ›
All Treasury marketable securities require a minimum bid of $100.
